Goldman Sachs: Why the Investing Desk Could Increase

Investing and lending

Public equities have given decent returns in the second quarter. Select sectors like tech underperformed compared to the run-up in industrials, retail, and financials. Goldman Sachs’ (GS) ILA (Investing, Lending, and Asset Management) segment focuses on private and public equities as well as lending activity across asset classes and regions.

Goldman Sachs: Why the Investing Desk Could Increase

Goldman Sachs posted 23% growth in the ILA segment’s revenues to $1.94 billion. Debt lending had 67% growth, while equities had 9% growth. The growth in lending through structured debt and higher net interest margins helped the bank see 40% growth in the net interest income. The trend is expected to continue in the second half of 2018 as rate spreads remained buoyant. The demand for structured debt is rising due to growth in middle market companies.

Private market equities

Equities, which command almost two-thirds of the segment’s revenues, rose due to private equities’ performance. The increase was partially offset by the weaker performance of investments in listed entities. With markets seeing renewed selling pressure in August, listed equities might deliver weaker returns in the third quarter, which could be offset by gains in private equities.

Alternative managers (XLF) including Blackstone (BX) and Carlyle (CG) and investment banks like Morgan Stanley (MS) are also focusing on private market equities. The valuations are stretched for listed entities. Macro concerns lead to volatile pricing.

Asset management

Goldman Sachs’ IM (Investing Management) segment has seen strong incentive income in recent quarters due to outperformance across equities and other asset classes. The bank managed revenues of $1.84 billion in the second quarter—20% growth due to assets under management of $1.5 trillion. The IM segment added $5 billion in new long-term flows in the second quarter.

New fund flows are drying up slowly for the industry. Volatility has dented the funds’ profitability and performance. With tech stocks dragging fund returns, investors might seek liquidity or debt funds in the short to medium term.